Press "Enter" to skip to content

Does widespread passive investing hurt market efficiency?

Tossed aside by investors and future retirees for decades, index investing has made major strides in recent years. Its advocates – spawning from the legendary Jack Bogle – are right when they argue that low cost index investing has trounced the active managers. This in part derives from the high fees charged by many active funds. However, arguably one source of index investing’s success was and is widespread active investing to sift through all the information. Large masses of active investors seem likely to make index holdings more efficiently priced. Yet – if the masses move to indexes in great enough numbers – could markets slip up? Perhaps that might make some more room for active investors to start winning.


  1. In what sense are markets efficiently priced? and to what extent does that matter to the economy as a whole? If passive investing disappeared, then perforce half of active investors would underperform, despite paying for professional advice. It sounds to me more like a recipe for active investors to start losing even more … but I still don’t know why I should care. Will that shift the underlying profitability of publicly traded firms? If not, then all this would do is shift the distribution of winners versus losers, while thanks to fees shifting the average towards lower aggregate returns (and a larger, richer financial services sector). And I don’t see why I should care about that!

  2. grieve grieve

    With the fees charged by most active managers, it requires at least a 5% return to even make investing with active managers worthwhile, and no active manager will consistently beat the market by 5%. Especially considering a 5% gain can more consistently be made by indexing and tax-loss harvesting, I see active management as essentially a non-starter.

Comments are closed.